Business and Finance

Estimated taxes, something most working Americans don’t have to deal with or may not even be aware of, can be a hidden cost when converting traditional IRAs to Roth IRAs.

With proper planning, however, this potential trap can be easily avoided.

Estimated taxes are payments we must make four times a year to the Internet Revenue Service if the amount we have withheld for taxes at work or elsewhere does not meet certain minimums.

If we fail to make the required estimated payments — due April 15, June 15, Sept. 15 and the following Jan. 15 for each tax year — we will owe a penalty for underpayments. The penalty, a variable interest rate set by the IRS, stood at 4 percent for the first quarter of 2010.

This is not a problem for most American workers, who instead tend to have too much money withheld from their paychecks and get large refunds.

But the income from a large Roth IRA conversion is likely to create a tax liability that may trigger the need to increase withholding and/or pay estimated taxes.

From the year 2011 on, income from a conversion must be reported for the year the conversion is made. But for conversions made in 2010, taxpayers can either report the entire conversion income for 2010, or report half of it for 2011 and the other half for 2012. This latter income split is the "default" option, or what will happen if the taxpayer does not choose otherwise.

The decision of when to report the income is not made until the taxpayer files the 2010 tax return in 2011. Therefore, somebody choosing to report the Roth IRA conversion income for 2010 may discover after the fact that he owes a penalty for not having enough withholding and/or not paying enough estimated taxes in 2010.

But we can avoid a penalty by using any of three so-called "safe harbor" methods.

The easiest to implement — it’s foolproof and you don’t have to make any estimates — is to have your withholding and any estimated tax payments add up to 100 percent of your total tax liability for the previous year, or 110 percent if your adjusted gross income was higher than $150,000 ($75,000 for married taxpayers filing separately).

For example, my wife, Georgina, and I, filing jointly, had income of less than $150,000 in 2009 and our total tax liability was $12,941 (the number on line 60 of Form 1040). Because we have no withholding as freelance writers, by making estimated tax payments totaling $12,941 for 2010, with a required minimum each quarter, we will not owe any penalties even if our taxable income balloons in 2010 because of a large Roth IRA conversion. Of course, we would still have to pay regular tax at filing time, but no penalty.

And under this safe-harbor method, we would then have to increase our estimated tax payments in 2011 to reflect the higher tax liability for 2010.

We have other options, though. A second "safe harbor" method is to have withholding and/or estimated taxes add up to at least 90 percent of the current year’s total tax liability. This method would lower estimated payments for 2011, but at the risk of estimating wrong and owing a penalty. A third safe harbor is that no penalties are due if your total tax due when you file your return is less than $1,000. This is a complex topic, and I recommend consulting a professional for personal questions.

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Shopping mall owner Simon Property Group Inc. is willing to settle for a slice of its biggest rival, just two months after it had a buyout offer rejected as too low.

Simon, the nation’s largest mall operator, on Wednesday offered to help finance General Growth Properties Inc.’s exit from bankruptcy in exchange for a quarter stake in the No. 2 mall owner.

Analysts suggested Simon may have backed off a bid for a complete takeover because of antitrust concerns.

But a person familiar with the talks said Wednesday that General Growth has made clear it prefers a strategy that would give it the financial means to emerge from Chapter 11 bankruptcy protection, rather than to be taken over. The person, who spoke on condition of anonymity, was not authorized to discuss the matter publicly easy pay day loans.

General Growth issued a brief statement noting it would study the latest Simon offer.

General Growth operates more than 200 shopping malls in 43 states, including the St. Louis Galleria, and is the nation’s second-largest shopping mall operator.

Among Simon’s eight properties in Missouri are the Regency Plaza center in St. Charles and the St. Louis Mills mall in Hazelwood. Most of Simon’s 20 Illinois properties are in the Chicago area. Its lone Metro East center is Lincoln Crossing in O’Fallon.

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Even in good times, the relationship between franchisors and their franchisees tends to be fraught. Toss in an economic downturn and things get downright nasty. Iconic brands are facing revolts in the trenches from owners fed up with their corporate parent.

Later this month, a Los Angeles jury trial will begin on a seven-years-old and still festering fight between UPS (UPS, Fortune 500) and a group of disgruntled franchisees of Mailboxes Etc., which UPS acquired in 2001. Quiznos recently settled a class-action lawsuit with its franchisees, while Burger King remains mired in a court battle with store owners over a $1 promotion for double cheeseburgers that cost more than a buck to produce.

Garth Snider, president of FranchiseOpportunities.com, a site that advertises franchises for sale, says the level of complaints by franchisees and franchisors alike "is commensurate with the hard economic times we’re experiencing. This wasn’t an issue three or four years ago, when there was plenty of money to go around, because franchisors weren’t looking to be as aggressive with their pricing."

When margins are razor-thin and sales slip, disputes are more likely to blow up into major skirmishes. The Quiznos fight featured complaints that Quiznos forced franchisees to buy food and supplies at inflated prices while setting retail prices so low that store owners couldn’t make a profit. Discounts — like those Burger King offered on its double cheeseburgers — are another flashpoint. T.G.I. Friday’s had a small war with its franchisees last year over a two-month promotion that slashed sandwich prices to a money-losing $5 each.

"It’s the divergence between generating volume by forcing your franchisees to charge lower prices and the net effect of that on the actual business owner, who still has to pay the same royalty and the same price for goods," says Justin Klein, a partner in Marks & Klein in Red Bank, N.J., and lead attorney for the Quiznos plaintiffs. "Essentially, it still costs you $5 to make the sandwich but you’re forced to sell it at $3.95."

The pressures come on all sides. One of Klein’s current franchisee clients is being forced by its parent company to extend operating hours — even if those extra hours aren’t profitable. "Forcing them to stay open longer means they have more employees there," he says.

Life in the trenches

Tish Reisman, owner of a Rita’s Italian ice outpost in Tampa, Fla., is facing many of the typical franchisee frustrations. She signed with the Trevose, Pa.-based parent company in June 2007, paying $65,000 for a two-store agreement. Reisman grew up in Philadelphia and had a fondness for Rita’s. She believed that in Florida "Italian ice would be a no-brainer."

The first store opened in March 2008. The problems began just six months later.

A competing Rita’s opened five miles away. A corporate marketing campaign required her to stand in front of Wal-Mart and Kmart stores handing out coupons, sucking up time and resources she couldn’t spare. Rita’s requires her to sell every new flavor it introduces for 24 days — even if it tanks.

"In November, I had to sell caramel apple, which I was throwing away every two days," she recalls. Rita’s projected waste from introducing new flavors is 7% and Reisman was given credit for that, but her actual waste was closer to 22%. "It would have been better if I could have decided what flavors would sell, rather than being forced to sell all of them."

Reisman lost $86,000 the first year she was in business and hasn’t been able to afford to open her planned second store. She’s sunk more $300,000 into the franchise. A single mother with four children, Reisman is worried about bankruptcy.

Jim Rudolph, CEO of Rita’s, says the coupon program and new flavor introductions have been successful for other franchisees. The company has been working with Reisman, he says, getting her rent reduced, offering incentives to potential buyers of her franchise, and negotiating with banks on her behalf.

"I feel terrible for her, but we also cannot be responsible for the unfortunate situation she’s gotten herself into," he says.

That’s the common line franchisors take when store owners run into trouble: You’re on your own.

Industry veteran says they’ve seen a few concessions to the economic downturn. "We’re seeing franchisors responding by temporarily deferring royalty payments," says David Kaufmann, a franchise attorney and partner with Kaufmann Gildin Robbins & Oppenheim in Manhattan. "Some have escalated corporate contributions to marketing programs, some are letting franchisees that promised to open new units now push that further into the future."

But Quiznos attorney Klein expects that even when the economy recovers, franchisees and franchisors will continue warring over the financial terms of their arrangement.

"I don’t think things like value meals and other low-priced promotions are going to stop," he says. "They are very popular with consumers." 

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About 4,000 laid off workers from companies including Freescale Semiconductor Inc. are eligible to apply for Trade Adjustment Assistance, the U.S. Department of Labor announced Thursday.

The federal Trade Adjustment Assistance Program is designed to help workers who have lost their jobs as a result of foreign trade.

The workers in 10 states are covered by the latest TAA certifications and will be contacted by state officials with instructions on how to apply for individual benefits and services, officials said.

Those who apply may receive case management and re-employment services, training in new occupational skills and trade readjustment allowances that provide income support for workers enrolled in training. Some workers may also receive job search and relocation allowances, and the health coverage tax credit.

Austin-based Freescale, which manufactures semiconductor chips, employs about 19,500 workers nationally, including 5,000 in Austin. The company was founded in 2004 as a Motorola Inc. (NYSE: MOT) spinoff. In early 2009, Freescale cut about 700 local jobs as part of companywide reduction of 2,400 positions.

Although Trade Adjustment Assistance is open to eligible workers of all ages, workers 50 and older may elect to receive Re-employment Trade Adjustment Assistance instead. If a worker obtains new employment at wages less than $55,000 and less than those earned in adversely affected employment, the RTAA program will pay 50 percent of the difference between the old wage and the new wage, up to $12,000 during a two-year period, officials said.

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Mattress and pillow maker Tempur-Pedic International Inc. has purchased its Canadian distributor, Tempur Canada Inc.

Financial terms of the purchase, which closed April 1 but was not announced until Monday morning, were not disclosed.

Tempur Canada will continue to operate as a subsidiary of Lexington, Ky.-based Tempur-Pedic (NYSE: TPX), according to a news release.

Tempur-Pedic officials said they will update the company’s financial guidance when they announce first-quarter financial results on April 20.

In the release, Tempur-Pedic CEO Mark Sarvary said the Canadian market is large and Tempur-Pedic’s share is “relatively low.” Company officials hope they can gain market share by increasing the company’s investments in sales and advertising in the market.

The company has taken similar actions in Austria, Australia, China and New Zealand over the past four years, according to the release.

Tempur-Pedic makes mattresses and pillows using a proprietary pressure-relieving foam material. It sells its products in more than 80 countries under the Tempur and Tempur-Pedic brand names.

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Average Oahu hotel occupancy rose 6.8 percentage points year-over-year to 77.7 percent for the week ending March 27, the highest rate among the major Hawaiian Islands.

At the same time, Oahu’s hotel room rates fell 1.1 percent to $153.39.

Statewide, room occupancy was up 4 percentage points to 71.7 percent, while room rates slid 5.4 percent to $177.37.

Occupancy and room rates for other Hawaii islands were as follows:

• Maui’s average occupancy rose 5.8 percentage points to 74.2 percent, while room rates plunged 9.3 percent to $230.69;

• Kauai occupancy was down 0.8 percentage points to 58.2 percent, while room rates dropped 8.7 percent to $191.42; and

• Big Island occupancy fell 5.1 percentage points to 55.4 percent, while room rates declined 7.5 percent to $166.66.

Nationwide hotel room occupancy inched up 3.3 percentage points to 59.9 percent, while room rates were off 1.6 percent to average $98.29 a night.

The weekly Hawaii hotel industry snapshot, based on a daily hotel survey of approximately 100 properties, is conducted by Smith Travel Research and Hospitality Advisors.

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